Mortgage Terminology

LTV – Loan to Value

A ratio of the loan amount the property’s value.  Loan value/Property Value = LTV%.  If you buy a house for $100,000, using an $80,000 loan and a $20,000 down payment, your LTV would be $80k/$100k = .80, or and 80% LTV

So for example, if the LTV is 125% then it means the loan is larger than the property value.  Lenders cant risk making a loan where the value is less than the loan amount, which is why homeowners who are underwater, can’t refinance. (Unless through a program like HARP – if they are lucky)

Appraisal

A written report by a qualified appraiser that provides a estimated value of the property in question.  The appraisal is created using comparative property analysis – that is looking at the actual sales value of other properties near the subect property, with adjustments for the square footage, condition of properties and ammenities.

Closing Costs

Expenses incurred by buyers and sellers when transferring ownership of property. Closing costs normally include an origination fee, attorney’s fee, taxes, escrow payments, title insurance and sometimes discount points. Lenders must provide good-faith estimates of closing costs to prospective home buyers.

Non Recurring Closing Costs

Some brokers pay these for you, some don’t.  They include the property Appraisal, Escrow and Title fees, Notary fees, and depending on the property a condo certification, HOA certification or subordination agreements.

Collateral

Property pledged as security to a debt. In a home loan the property itself (your home) secures the loan.  If the borrower fails to repay the loan, the lender may gain ownership of the collateral and sell it to recover the money (the foreclosure process)

Down Payment

The amount of money the brrower pays in cash for the property.  Usually 20% of the purchase price is recommended.  While you can get loans with less than 20% down, often times you have to pay various forms of mortgage insurance which is an additional cost, and the rate on your loan will be slightly higher if you have less equity in the home (lower down payment).  The home purchase price – down payment = mortgage amount.

Escrow

An depository account in which a neutral 3rd-party holds the documents and money in a real-estate transfer until all conditions of the home sale are met.   The escrow account may also used to hold money until property taxes and insurance are paid.  When you make your mortgage payment, the proptery tax and insurance monies are added to the escrow account.

Adjustable-Rate Mortgage | ARM

A home loan in which the interest rate changes periodically, usually once a year, based on a particular financial index. Most ARMs will have a fixed rate of interest for a stated number of years (3,5,7 or 10), and then will adjust based on the Index + a percentage.  For example an ARMs adjustment rate might be LIBOR +2.5%; so that at the adjustment period, if LIBOR is at 1.5%, then the adjusted rate would be 4.0%.  If the LIBOR is 5%, the the adjusted rate for the borrower would be 7.5%.  Most ARMs have caps on how much an interest rate may increase, recently the cap is somewhere around 11%.   While ARMs are beneficial for many borrowers, there is always a risk that in the future, the rate spikes, and the monthly payment rises significantly.

Annual Percentage Rate | APR

A standardized method of calculating the cost of a mortgage, stated as a yearly rate, which includes such items as interest, mortgage insurance, and certain points or credit costs. If the lender pays for the costs, the APR rate will be very near to rate on the loan, but because it includes these other items, it is generally higher than the interest rate on the mortgage.

Private Mortgage Insurance | PMI

An insurance policy that protects the lender against default on loans in case the property value is not suffient to cover the loan balance in the event of foreclosure.  PMI is usually required if the down payment is less than 20 percent of the sale price, and depending on the loan amount will usually be a few hundred dollars per month.  PMI is paid in monthly installment in addition to the principal and interst payment on the note, and is not terminated until the value of the loan is reduced to 80% of the home value/purchase price.

The HARP Program  is designed to help underwater borrowers a rare opportunity to refinance their mortgage without incurring the additional costs of PMI.

Fixed-Rate Mortgage

A home loan in which the interest rate stays fixed for the life of the loan (whether the loan is a 15, 20, 30, 40 years in length.)  With a fixed rate loan your principal and interest payment – your monthly housing payment, can will never change.   loand most often 15 years or 30 years.

Foreclosure

The legal process through which a lender on a property may take possession of the property away from the borrower, in order to sell the property and recoup its investment (loan balance).  The foreclosure process is used by lendders when a homeowners defaults on the loan, – by failing to make timely mortgage payments.   Foreclosure when it goes full-cycle, usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt and property taxes owed.

Good Faith Estimate | GFE

A written estimate of expected closing costs.  A  lender must provide prospective borrower a GFE within three days of the borrower submitting a loan application. Lenders (and brokers) are required by law to make the GFE estimates as accurate as possible.

Homeowner’s Insurance

An insurance policy, covering loss or damage to property (including hazard coverage), as well as coverage for personal liability and theft.  Lenders require borrowers to maintain homeowners insurance as long as their is a loan balance to protect their investment in the property.

Point

A point equals one percent of a mortgage loan. Some lenders charge “origination points” to cover expenses of making a loan. Some borrowers pay “discount points” to reduce the loan’s interest rate.

Principal Balance

The amount of debt, excluding interest, left on a loan.

Title insurance

A policy that guarantees that a property owner has title (clear ownership of) to a property and can legally transfer title another party in the event of a sale or other transfer.  If the title/ownership comes in dispute at a later date,  the title insurer pays any legal damages. A policy may protect the mortgage lender, the home buyer or both.